WRAPUP 3-Stockton, California, to file for bankruptcy

STOCKTON, Calif., June 27 (Reuters) - Stockton, California,is expected to file for bankruptcy before the end of the week,becoming the largest U.S. city to seek protection from itscreditors.

No one in the city of nearly 300,000 is relishing theprospect, though some see no choice.

Stockton, which boomed a decade ago with workers from theSan Francisco Bay area seeking affordable housing, is the mostrecent casualty of the housing bust of the past few years.

After failing to strike a deal with city employee unions andother creditors, Stockton's city council passed a budget after afive-hour meeting on Tuesday night. The budget calls for an endto retiree healthcare benefits a year after the city files forbankruptcy, which is expected by Friday afternoon.

Stockton busted spectacularly, and it still is swimming inforeclosures. It has been cutting city jobs for years. The costof pensions and healthcare have overwhelmed it.

The plan for Chapter 9 bankruptcy, which includes droppinghealthcare for retirees who are now fully covered, will close a$26 million deficit in Stockton's budget for its fiscal yearthat begins on July 1.

Former city workers, often too young to retire understricter federal guidelines, face poor employment prospects.

Since October 2007, the last time unemployment was under 10percent in Stockton, the city's population of job seekers hasswelled by 10,000 and the number of people who are employed hasdecreased. Unemployment was estimated at 17.5 percent in May.

"I'm pretty much out of luck," said Patricia Hernandez, 57,who retired two years ago from her job with the city library. Acancer survivor, she is worried the disease might return.

Her diabetic husband gets dialysis worth $22,000 a month,which she does not expect to be able to afford after Stocktoncuts medical coverage in a year.

Hernandez retired young, but not in luxury, and takes inabout $1,700 per month. She is five years too young for earlyretirement in the federal Social Security program.

Stockton, like many California city and state governments,lets employees retire as early as 50 or 55. While some publicpensions in the state are more than $100,000 per year, thestatewide monthly average for the California Public Employees'Retirement System (Calpers), which administers Stockton's plan,is $2,332. The average Calpers retirement age is 60.

CITY NEVER SET ASIDE FUNDS FOR HEALTHCARE

Stockton never set aside funds for retirees' healthcare, soit has had no cushion as their medical costs soared. During the1990s the city greatly expanded its generous healthcare benefitsto retirees. St o ckton officials say the city faces today aliability for its retiree medical program of $417 million. Former Stockton City Manager Dwane Milnes, 66, whorepresented retirees in talks with the city, estimates that amajority of retired Stockton employees will not be able to payfor healthcare.

Geri Ridge, a single 56-year-old former records assistantfor Stockton's police department, has told her daughter to signup for MediCal, the state's health plan for the indigent. Ridgehad counted on having healthcare coverage when she calculatedthat she could retire early on a pension, which is $1,895 permonth.

"I expected the city to take care of me," said Ridge, wholeft the city's payrolls after a heart attack and will now dropher coverage.

While Stockton will cut retiree healthcare coverage, it doesnot plan to alter pension plans for fear of a battle withCalpers. Some taxpayers consider benefits for city employees asweet deal.

"I was amazed by the level of benefits we received," saidformer city planner Denise Jefferson. "It was ridiculous."

She now works for a business improvement district and seesbankruptcy as being necessary for Stockton. "I'm thinking'Welcome to the real world,'" she said.

"For people who say, 'You can't do this,' I say show us thepot of money," she said. "There's no money."

Standard & Poor's Ratings Services downgraded Stockton todefault from selective default on Wednesday, citing the city'smove toward bankruptcy and expectations that it will notsubstantially pay all of its obligations as they come due.

Moody's said its move was based on Stockton's bankruptcybudget. It suspends $10.2 million in debt payments along withcutting employee compensation and retiree benefits by $11.2million. About $7 million in savings would come from cuttingretiree medical benefits for one year and then phasing them out.

Stockton has already defaulted on about $2 million in debtsince February, allowing the trustee for one of its bondinsurers to seize a building once slated to be its future cityhall and three parking garages.